The Top Secret Way Your Credit Score is Determined

credit score

Have you been shopping for a mortgage or auto loan recently and walked away confused about why you were offered such sky-high interest rates? You should know that checking your credit is important. But what if you have no idea what’s wrong with it or how to get it back on track.

Ninety percent of lenders use what’s called a FICO® score to help determine whether to lend you money, how much to loan, and at what rate. This credit score won’t make or break the decision, but it plays a significant role.

FICO® is a company that draws information from your credit reports from three bureaus: Equifax, Transunion, and Experian. The company then uses the information to create a score based on your creditworthiness. Each bureau produces a different, but similar credit report, so your three FICO® scores will vary.

Essentially, the FICO® score predicts the likelihood of whether you’ll repay a loan or balance on a credit card.

Knowing what defines your credit score will help you get approved for a wider variety of lending choices at more competitive interest rates. Look at it this way. If you understand what defines your score, then you have a better chance at raising it with solid credit card practice.

Improving your score could mean the difference between whether you get a great rate that helps you buy a car or a high-interest rate that weighs heavy on your budget.

If you want to improve your chances of getting great rates, it helps to know what defines the score. Keep reading to find out how FICO® calculates your credit score.


Payment History

Thirty-five percent of your FICO® score comes from your payment history. The score looks at whether you’ve had any missed payments, how recent, and how frequently they happened. The more recent and often your late payments are, the lower your score will dip.

In addition to delayed payments, it looks at court records like bankruptcies, judgments, foreclosures, and accounts that have gone into collection.

Keeping this portion of your record clean is vital to having a good credit score. Be sure to make your payments on time by setting up automatic bill payments through your bank or setting monthly payment reminders on a calendar.


Amounts Owed

Thirty percent of your score comes from the amount of total debt owed. FICO® looks at your account balances and how much credit you’ve used from each lender. It examines credit cards that are almost maxed out and determines if you are overextending your credit.

Try to keep each credit balance below 30% of the total credit limit. This will demonstrate that you are not scrambling to make ends meet and will signify your ability to control your finances.

Payment History and Amount Owed make up the largest portion of your credit score, so focusing on improving these two items is a good idea if you’re trying to improve your credit.


Length of Credit History

Fifteen percent of your score comes from the length of your credit history. The company will look at your oldest and newest accounts and determine the average age of all accounts.

Young adults and new immigrants typically have the most trouble with this section, because they likely have never gotten a credit card.

One easy way to establish credit is to get a secured credit card. This is a credit card that is backed by your actual funds.

Credit history also comes into play when you are considering closing an account. Aim to keep all your oldest accounts open to keep your credit history length as long as possible.


Credit Mix in Use

Ten percent of your score comes from the variety of credit that you use. FICO® likes to see a broad range of credit, including:

  • Credit Cards, such as bank cards from Visa, MasterCard, and American Express.
  • Retail Cards, such as J.C. Penny’s and Best Buy.
  • Installment Loans, like auto, educational, and mortgage loans.
  • Finance Companies, like loans for medical care or furniture.

Use a variety of cards and loans to keep a healthy score.


New Credit

Ten percent of your credit score comes from new credit history. How many credit applications have you filled out in the last 12 months? The number of hard inquiries on your credit report matters.

The score does not look at soft inquiries like promotional, consumer disclosure, insurance, and employment.



The first step to keeping a healthy credit score is to check your credit report often. Your FICO® score will make a difference in what type of loan you get and how much you pay. Monitoring and improving your score keeps your interest rates lower so you can go easier on your wallet.

Have you ever raised your credit score? What steps did you take to improve it?

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